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Earnings Preview: Safeway

Safeway Inc. (SWY) is set to report its first-quarter 2013 results on Apr 25. Last quarter, this food and drug retailer posted a huge positive earnings surprise of 23.68%. Let’s see how things are shaping up prior to the announcement.

Safeway’s Growth Profile in the Last Quarter

Safeway’s “Just for U” loyalty program was a positive catalyst driving profitability and market share. Based on the loyalty program, management expects ID sales to accelerate in 2013. In addition, the 2013 guidance, which reflects the revival of strong business momentum and prospects of improved execution, boosted investor enthusiasm. We believe that Safeway is set on a high growth trajectory.

We remain concerned about the highly leveraged balance sheet of Safeway. The company continues to operate with a high debt level of $5.2 billion at the end of 2012 as against the year-ago figure of $4.6 billion. As a result, the company’s leverage stood at 1.8 at the end of 2012 compared with 1.2 at the end of 2011.

Safeway also witnessed margin contraction due to higher expenses related to the launch of its loyalty program and change in sales mix in the last reported quarter. Notably, the company undertook cost saving initiatives to brace margin pressure.

Earnings Whispers?

Our proven model does not conclusively suggest that Safeway is likely to beat earnings estimate this quarter. This is because a stock needs to have a positive Earnings ESP (Read: Zacks Earnings ESP: A Better Method) as well as a Zacks Rank #1, 2 or 3 for this to happen. This, however, is not the case for Safeway as seen below:

Zacks Earnings ESP: The Most Accurate Estimate stands at 35 cents and the Zacks Consensus Estimate is at 36 cents. This comes to a difference of -2.78%.